Ocean Career

Ocean Carriers

Background

Ocean Carriers Inc owned and operated capesize dry bulk carriers that mainly carried iron ore worldwide. In January 2001, Mary Linn, vice president of finance for Ocean Carriers, was evaluating a lease of a ship for three years. Since, Ocean Carrier was not able to meet customer’s requirements; Linn has to decide whether commission a new capesize carrier immediately. New carrier would be completed two years. (Another words, Linn has to evaluate whether to purchase a new cargo ship, and lease it for three years.) Ocean Carrier’s vessels are mostly chartered for 1, 3, or 5 years. However, spot charter market is used occasionally.

( However, the proposed contract with the customer is only for 3 years. Therefore, after the three years, the ship will have to be leased for other customers. It is Linn’s responsibility to decide if future market conditions warranted a considerable investment in the new ship. The objective of this case study is to estimate the NPV of the investment in the new capesize carrier. )

Capesize dry bulk carrier size from 80,000 to 21,000 deadweight tons of cargo carrying capacity. Capesize carriers were too large to transit Panama Canal, so they had to sail around Cape Horn to travel between the Atlantic and Pacific Oceans. Sailing around Cape Horn is longer and riskier route.

Before NPV

1. How the capesize carrier’s business is conducted

2. The future prospect of the market

Ocean Carriers uses 9% discount rate

1. Do you expect daily spot hire rates to increase or decrease next year?

Daily hire rates determined by supply and demand. In 2002, supply of capesizes will increase (fleet size increase), and the demand of shipment will decrease or stays the same. Therefore, the spot rate will decrease next year.

Supply of Capesizes

Exhibit 2

Exhibit 2 shows the capesize fleet by age category as of 2000.

Exhibit 3

Exhibit 3 shows the number of new capesize vessels by expected delivery date....